Don't blame the media for fuelling the crisis
By
Simon Nixon Oct 24, 2008
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The BBC's Robert Peston: public enemy number one?
Picking up a new suit the other day, I was taken aback to find myself harangued by the tailor on the role of journalists in stoking up the financial crisis. "You lot should be more responsible," he said. "I've had clients who have got plenty of money cancelling orders because they're worried about what the press is writing and saying." A few days later, I suffered a similar assault from a friend with a small events business. Meanwhile, the blogosphere is full of angry screeds blaming the world's economic woes on BBC business editor Robert Peston. Forget greedy bankers or incompetent regulators, it seems the media is becoming public enemy number one.
Not surprisingly, I don't buy this for one minute. If anything, journalists are guilty throughout this crisis of not sounding pessimistic enough. Either that, or no one has been paying attention to what we have been reporting. The surprising thing is not that my tailor's clients are cancelling orders now, but that they did not do so a year ago. The UK savings rate has continued to fall over the last year and even dipped into negative territory – which suggests that people have been dipping into their savings since the crisis started rather than cutting back on their lifestyles. Until the financial system virtually collapsed a few weeks ago, potentially leaving banks unable to dispense cash, life for most people carried on very much as normal.
Well, life is certainly not continuing as normal now. Evidence that the economy is deteriorating fast is everywhere – in rising unemployment, plunging house prices, falling retail sales and lower manufacturing orders. Not even the Prime Minister or the Governor of the Bank of England now bothers to deny we are heading for recession. But how bad will it get? Far from exaggerating the risks, I suspect most forecasters and commentators actually downplay them for fear of sounding alarmist. A year ago, plenty of economists suspected the UK would go into recession but few were prepared to say so publicly. Besides, in the current crisis, there are too many variables for anyone to say with any confidence how deep this recession will be or how long it will last. But it is worth looking again at some of those variables to see quite how grim is the outlook, regardless of anything any journalist may say or write.
First, one of the most important sources of bank funding has almost entirely dried up and won't be back any time soon. The securitisation markets are not going to reopen until house prices in the UK and US fall to levels where first-time buyers equipped with prudent mortgages are able to re-enter the market. We are still a very long way from that point. But without this source of funding, banks will have no option but to cut back lending to the rest of the economy.
Second, so long as house prices keep falling, bank losses will keep mounting and bank capital will be eroded. Before the latest round of government bailouts, total fresh capital injected into the global banking system amounted to about $450bn against anticipated losses of $1.3 trillion. Despite the huge sums being put in by governments, it is unlikely to plug the gap. Add in tough new capital targets from regulators and it is clear that banks are in no position to start lending freely again.
Third, the losses from this crisis are mounting fast as the crunch spreads. In recent weeks, I've run into some very worried hedge fund managers who are being hit by a double whammy of massive redemptions and loss of bank funding. As a result, funds are being forced to liquidate positions, forcing prices lower, which in turn could trigger further margin calls and forced liquidations, and more banking losses. A similar story is playing out across the commercial property and private equity sectors as longer-term funding deals put in place 18 months ago before the crisis need to be rolled over.
Finally, this is a global crisis, so what happens in one country will have a bearing on what happens elsewhere. Politicians say they are working together – President Bush has called a summit of world leaders for next month – but events may now be beyond their control. International trade has stalled and several countries are close to bankruptcy. The Baltic Dry Index of international shipping has plunged. A friend in shipping tells me there are ships lying idle around the world, unable to pick up or offload cargo because of the lack of financing. Governments today are unlikely to be stupid enough to repeat the mistakes of the 1930s, when the US Smoot-Hawley Act initiated a global tariff war. But they do not need to if the loss of trust between countries does the job for them.
All of this leads me to conclude that this recession will be particularly nasty. That may not be what my tailor wants to hear. But he should be glad that my reluctance to sound alarmist prevents me from predicting something worse.
• Simon Nixon is the author of Credit Crunch: How Safe is Your Money? Priced £5.99, www.pocketissue.com.
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